New rules from NACHA (The Electronic Payment Association) enable billers to convert paper checks to electronic debits, giving them much more flexibility and speed in receiving payments, while also forcing merchants who use the ACH system to upgrade their check readers to imaging systems.
The permanent rules that went into effect on March 15, 2002 are:
- Implement a distinct Standard Entry Class Code, ARC.
- Adopt a "Regulation E" legal framework.
- Require that source documents (checks) be destroyed no later than 14 calendar days after settlement and that a copy be made.
- Allow payments deposited in a lockbox to be converted to ARC entries.
- Allow only consumer checks to be converted.
- Do not establish any dollar limit on items that can be converted.
The rules affect all payments going through the ACH network. Most of the transactions affected are "lockbox-type" transactions for recurring bills. A little less than one third of all checks are lockbox-type payments, like monthly bills for mortgages, insurance and credit card payments, according to Nancy Grant, NACHA Senior Director of Electronic Check Services.
However, the rules also affect merchants using check scanning systems, such as those from IVI Checkmate and similar vendors, who will no longer be allowed to keep the physical checks for collection purposes in case of rejected (e.g., "bounced" checks) items.
Retaining the physical checks gave these merchants additional information such as the check writer's address, name, etc., in addition to the MICR line information recorded by the check scanner, said Harold Montgomery, President of Checktronic, Dallas, Tex.
In order to have maintain this information in the future, these same merchants will need to upgrade their check scanning systems to check imaging systems from companies like RDM Corp., Waterloo, Ontario, Canada.
Most of the merchants affected in this manner are the large retailers, like Wal-Mart, though an increasing amount of smaller retailers had started using check scanning systems over the last few years.
NACHA chose to make the move to electronic check conversion largely because truncating checks rather than keeping the physical paper means quicker processing and quicker payment for the billers.
With the new system, the billers can also time the representment of the transactions if the checks are rejected the first time. This can be helpful in a couple of different ways. The checks can be represented more quickly, which means more likelihood of payment, or the representment can be timed. In Washington, D.C., for example, a large percentage of people are government workers. So there are a large percentage of paychecks deposited on specific days each month. In such a case, representment of the transaction can be timed for those dates, when there is a better chance of cash being available to cover the transaction(s). Representment can't be timed with paper checks.
However, there are some drawbacks as well. Merchants won't want to buy new systems just a short time after getting their first check scanning systems.
"The (older) check scanning systems were using a transitional technology," Montgomery said. "This is the natural evolution of the product."
The biller can continue to use the traditional paper check clearing system as long as he does not go through the ACH network.
Fifteen banks, one credit union and numerous companies participated in the pilot. Among the banks were Bank One, Wells Fargo, Comerica and 13 smaller institutions. NACHA refused to release the names of participating companies.
Allstate Insurance is the first biller that announced it was going to take advantage of the new rules.
Though only consumer checks can be converted now, NACHA has another pilot underway that is examining adopting similar rules for business checks.